Practitioner course in derivatives
Volatility Trading
Trading volatility as an asset: the gap between implied and realised volatility, delta-hedged options and their profit, variance swaps, VIX futures and their term structure, the volatility risk premium and the tail risk that comes with harvesting it.
Volatility trading treats the size of market moves as something to buy and sell. An option-holder who hedges the direction away is left with a bet on volatility: profit if the market moves more than the option price implied, loss if it moves less. This course teaches how that works, the instruments desks use, and the risks that have broken funds.
Why does implied volatility usually exceed realised volatility?
Because investors pay for insurance against crashes, and sellers of that insurance demand a premium for the losses they take in them. That gap, the volatility risk premium, has been one of the most persistent sources of return in markets, and one of the most dangerous to collect without limits.
How is the course taught?
Audio lessons give the general subject, explainer films show delta-hedging profit building up day by day, and the workbooks hold worked examples, notebooks and cheat sheets of the pricing formulas. The lab receives written feedback from the faculty.
Who is this course for?
Options traders, quants and portfolio managers who want to trade or hedge volatility. It counts toward the Certificate in Derivatives Pricing and so toward the Fellowship in Computational Finance.
What you will be able to do
- Explain and measure the profit of a delta-hedged option from implied and realised volatility.
- Price and replicate a variance swap and explain its link to the VIX.
- Read the VIX futures term structure and the roll yield of volatility products.
- Design a volatility strategy with explicit limits on tail loss.
Syllabus, module by module
Realised and implied volatility
Estimators of realised volatility and what implied volatility forecasts.
The delta-hedged option
Gamma, theta and the profit from the gap between implied and realised.
Variance and volatility swaps
Replication from a strip of options and the link to the VIX formula.
VIX futures and products
Term structure, contango, roll yield and the volatility exchange-traded products.
The volatility risk premium
Why implied tends to exceed realised, and how the premium has been harvested.
Tail risk
February 2018, March 2020 and position limits that survive them.
How the certificate is earned
Graded problem sets and a final lab: a delta-hedging simulation and a backtest of a volatility risk premium strategy with tail-risk limits. On a pass you receive the Course certificate in Volatility Trading, issued by the Institute with a verification code. Read how certification works.
Before you start
The option Greeks and implied volatility at the Institute's level.
This course counts toward
- Certificate in Derivatives PricingDerivative pricing in one semester of ten courses and a capstone, from stochastic calculus to stochastic volatility and interest rate models: how options are priced, hedged, traded and calibrated to the market.
- Fellowship in Computational FinanceThe top credential on the researcher path. Four semesters, 38 courses, and a dissertation supervised in writing and examined by two faculty members.
Questions applicants ask
What is volatility trading?
It is trading the size of price moves rather than their direction, usually through options that are delta-hedged, variance swaps or VIX futures. The trader profits when realised volatility differs from what the market implied.
Is selling volatility a safe income strategy?
It earns a premium most of the time and loses suddenly and heavily in market shocks. Several volatility funds and products were wiped out in a single day in 2018. The course treats tail limits as part of the strategy.